Cost vs Revaluation
cost vs revaluation
How does the cost model differ from the revaluation model? In your opinion, which of the two models would company managers prefer adopting (i.e. the cost model or the revaluation model) in accounting for property, plant and equipment? Discuss.
(2.5 marks)
To explain how the cost model and revaluation model differ, we first have to examine closely what each of these models need.
Under the rules of AAS B116
The cost model after an asset has been recognised as an asset and an item of property, plant and equipment, the amount will be carried at its cost less any accumulated depreciation and ant accumulated impairment losses.
However under the Revaluation model, after recognition of an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revaluated amount, being it’s fair value at the dated of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses. It also states that revaluation shall be done regularly, to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of each reporting period.
When recording using the Cost model, any loss due to impairment will be recorded as a loss under an impairment account, Accountants will first compare the PPE’s carrying amount, which is the original cost less its accumulated depreciation, and compare it with the recoverable amount. The recoverable amount is derived from the largest of, the fair value less selling cost and the value in use. If the Carrying amount is larger than the recoverable amount, then an impairment shall be recorded as it is unlikely that we will be able to recover the carrying amount in the current market. However if the carrying amount is smaller than the recoverable amount, we will not be required to record and impairment, and it there were previously impairment losses a gain of the loss will be recorded and lower the
How does the cost model differ from the revaluation model? In your opinion, which of the two models would company managers prefer adopting (i.e. the cost model or the revaluation model) in accounting for property, plant and equipment? Discuss.
(2.5 marks)
To explain how the cost model and revaluation model differ, we first have to examine closely what each of these models need.
Under the rules of AAS B116
The cost model after an asset has been recognised as an asset and an item of property, plant and equipment, the amount will be carried at its cost less any accumulated depreciation and ant accumulated impairment losses.
However under the Revaluation model, after recognition of an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revaluated amount, being it’s fair value at the dated of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses. It also states that revaluation shall be done regularly, to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of each reporting period.
When recording using the Cost model, any loss due to impairment will be recorded as a loss under an impairment account, Accountants will first compare the PPE’s carrying amount, which is the original cost less its accumulated depreciation, and compare it with the recoverable amount. The recoverable amount is derived from the largest of, the fair value less selling cost and the value in use. If the Carrying amount is larger than the recoverable amount, then an impairment shall be recorded as it is unlikely that we will be able to recover the carrying amount in the current market. However if the carrying amount is smaller than the recoverable amount, we will not be required to record and impairment, and it there were previously impairment losses a gain of the loss will be recorded and lower the